San Jose, CA · Member since 2014 · 43 posts · 15 votes
Hello I am just getting started in NNN investment, and mainly looking at national brand tenants in Quick Service Restaurants(QSR). Comparing two deals - with almost same price point #1. no rent increases but Percentage rent lease - There is a base rent ( ~65% of NOI) and the rest is percentage of their gross sales in last 12 months #2. 10% rent increase every 5 years
As a newbie option #2 seems preferable /safer to me, and #1 may be slightly riskier. Would love to hear the opinion of experts.
And also if you have any recommendations for brokers and lenders specializing in NNN please let me know.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
2y
I never heard of option 1 and I have been doing this for 20 years. I would choose option 2, because when the economy goes south, gross sales take a dive. Make sure you buy the lot and not the brand! In other words when dunkin donuts decides to close a location, you are able to release it quickly. Trust me I know!!! Nothing lasts forever. Factors such as competition, food trends, lack of management, ingress etc, can close these stores. Ingress and Egress and drive thru capability are a must have. Even the side of the street that the QSR is on matters. One side of the highway can be more profitable than the other. Make sure you get the sales data and ask where this store stands financially in the region. If the broker doesn't know then you walk in and ask the manager...You would be surprised once you start getting people to talk. The other reason why you would choose option 2 is that no investor would ever buy #1 and the bank might have trouble financing a deal where the revenue can be iffy.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
2y
I never heard of option 1 and I have been doing this for 20 years. I would choose option 2, because when the economy goes south, gross sales take a dive. Make sure you buy the lot and not the brand! In other words when dunkin donuts decides to close a location, you are able to release it quickly. Trust me I know!!! Nothing lasts forever. Factors such as competition, food trends, lack of management, ingress etc, can close these stores. Ingress and Egress and drive thru capability are a must have. Even the side of the street that the QSR is on matters. One side of the highway can be more profitable than the other. Make sure you get the sales data and ask where this store stands financially in the region. If the broker doesn't know then you walk in and ask the manager...You would be surprised once you start getting people to talk. The other reason why you would choose option 2 is that no investor would ever buy #1 and the bank might have trouble financing a deal where the revenue can be iffy.
Cincinnati, OH · Member since 2020 · 4k+ posts · 3k+ votes
2y
@Kiran R., while John has a lot more experience than I do, and no real estate investor wants to be a restaurant operator, there are some upsides to Option 1, as I see it.
The lower base rent could allow the Option 1 tenant to remain open throughout a recession, while option 2 may decide to close down the sales drop, if rent is too high.
But beyond that, are a lot of factors that I would assess:
Who is the actual guarantor on each lease? Is one local franchisee with no corporate guarantee and the other is a corporate store? If both are franchisee's is one a multiplication owner and other is single location?
Who is the tenant? Is one a growing concept and the other is retracting?
As John noted, what are sales of each, and how are they trending? How do those sales sit within each concepts rankings?
How customized are the buildings? I.e. Some concepts are fairly extensively customized facades and interiors (i.e. Olive Garden, I know this isn't QSR). If I were looking at a restaurant, I would be looking for the most generic building concept as possible, to minimize buildout cost.
Again, to repeat John, is one a superior location to the other? If talking restaurants, going home side of road tends to be better. On the "bedroom" side of any nearby interstate. Signalized access, ideally with turn lane and signal, but at least right/left in, right/left out. Near necessity based retail, etc.
At the end of the day, there is a lot that can vary between two properties.
Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
2y
To follow up on Evans point about option 1, I would advise not getting suckered into this arrangement as it handcuffs you when the economy is in a recession. Usually tenants will come to you in recessionary times about a break in rent. In the past I just give them a 10% deduction in rent for one year until things can improve. In one case I game them a percentage based rent for a year as well (covid), then reverted back to the fixed lease afterwards. If a tenant is asking for rent reduction in normal times, then that's a red flag that you have to find a new tenant.
Hello I am just getting started in NNN investment, and mainly looking at national brand tenants in Quick Service Restaurants(QSR). Comparing two deals - with almost same price point #1. no rent increases but Percentage rent lease - There is a base rent ( ~65% of NOI) and the rest is percentage of their gross sales in last 12 months #2. 10% rent increase every 5 years
As a newbie option #2 seems preferable /safer to me, and #1 may be slightly riskier. Would love to hear the opinion of experts.
And also if you have any recommendations for brokers and lenders specializing in NNN please let me know.
Thank you 🙏
I'd certainly echo what most have said here, #1 sounds out of the norm for what I'm used to dealing with in retail.
Also will 1 up the sentiment to underwrite the dirt itself, and the building itself. Where are these in the shopping center? are they even in a shopping center? is there an alternate use to put in there following the restaurant. wink wink, if its in a grocery anchored center retail medicine would be a great alternate use.
and I assume you are looking at a free standing single tenant building, especially if its a QSR....just very surprised there isn't some kind of a ground lease at play here, given the situation.
Real Estate Agent · Dallas - Fort Worth, TX · Member since 2015 · 89 posts · 33 votes
1y
@Kiran - We saw similar to option-1 with local and national tenants after leases were amended during the pandemic.
I would suggest to review their last 3-5year financials, visit the place multiple times and check traffic, competition, customer service etc. Also use Placer.ai stats to compare both properties, local demographics, median income etc
Our experience on the lending side is that if gross sales are consistent over last 3-years, under writers will consider this income
I would definitely consider option-1 based on tenants sales, NOI and how stable the restaurant is running. I strongly believe risk and reward go hand in hand :) Good luck